Sanara MedTech(SMTI) - 2019 Q4 - Annual Report

Letter from the Executive Chairman and Vice Chairman Sanara MedTech achieved significant revenue growth and strategic expansion in 2019, but anticipates a downturn in 2020 due to the COVID-19 pandemic 2019 Performance Highlights | Metric | 2019 | 2018 | Growth | | :--- | :--- | :--- | :--- | | Total Revenues | $11.8 million | $8.8 million | 34% | - The company expanded its Board from three to six directors, adding health care experts Dr. Kenneth E. Thorpe and Ms. Ann Beal Salamone[13] - Operations were reorganized into two divisions: Surgical and Wound Care, led by newly appointed presidents Zachary B. Fleming and Shawn M. Bowman, respectively, who were later promoted to Co-COOs[14] - Three new products were introduced in 2019: PULSAR II™ (debridement system), BIAKŌS™ (antimicrobial cleanser), and HYCOL™ (hydrolyzed collagen)[16][17] - The company anticipates a business downturn due to the delay in elective surgeries caused by the COVID-19 pandemic and is taking steps to cut costs and manage cash flow[19] PART I Business Sanara MedTech develops and distributes wound and skin care products in North America, completed a reverse merger with Cellerate, LLC, and faces intense competition - The company's core business is the development and distribution of wound and skin care products for the North American surgical and advanced wound care markets[22] - Key products include CellerateRX® (Surgical Activated Collagen®), HYCOL™ (Hydrolyzed Collagen), BIAKŌS™ (Antimicrobial Cleanser), and PULSAR II™ (Wound Irrigation System)[22] - In March 2019, the company acquired the remaining 50% of Cellerate, LLC, making it a wholly-owned subsidiary; this transaction was accounted for as a reverse merger and recapitalization[24][25] - The company expects to launch BIAKŌS™ Antimicrobial Wound Gel and BIAKŌS™ Antimicrobial Barrier Film in 2020[29][30] - The company competes with large manufacturers like Smith & Nephew, Acelity, Medline, ACell, and Integra LifeSciences, but believes its products offer better efficacy and cost savings[34] Risk Factors The company faces significant risks across operations, product obsolescence, intellectual property protection, complex regulatory compliance, and common stock volatility due to concentrated ownership Risks Related to Business Operations Operational risks include a history of losses, unpredictable revenue, challenges in market acceptance, potential capital shortfalls, and intense competition from larger, better-resourced companies - The company has a history of net losses and may not maintain profitability due to significant investments in sales and clinical programs[37] - Future capital requirements are uncertain; if cash flow is insufficient, the company may need to seek additional equity or debt financing, which could dilute ownership or increase debt service obligations[43][44] - The company faces significant competition from large, well-established medical device manufacturers with greater financial resources, distribution networks, and brand recognition[48][50] Risks Related to Products Product risks include obsolescence due to competitor innovations and potential product liability claims that may exceed insurance coverage - Competitors may develop more effective technologies, rendering the company's products and technology obsolete[53] - The company faces exposure to product liability claims; a successful claim in excess of insurance coverage could materially harm the business[54] Risks Related to Intellectual Property Intellectual property risks involve limited protection from patents and trademarks, potential challenges to proprietary rights, and costly infringement litigation from third parties - The company relies on patents, trademarks, and trade secrets, but these may not adequately protect its rights or provide a competitive advantage[55] - The company may be subject to infringement claims from third parties, which could result in costly litigation, require licensing agreements, or force the development of non-infringing technology[56] Risks Related to Regulations Regulatory risks include extensive and costly FDA compliance, uncertain product clearance processes, adverse changes in reimbursement policies, and severe penalties for non-compliance with anti-kickback and fraud laws - The business is significantly impacted by government regulation from the U.S. FDA and similar foreign agencies, which is time-consuming and expensive[57] - Obtaining regulatory clearance (510(k)) or approval (PMA) for future medical devices is a costly, time-consuming, and uncertain process that could delay or prevent commercialization[61] - Changes in reimbursement policies by third-party payers like Medicare and Medicaid could adversely impact the use and pricing of the company's products[66][68] - The company must comply with federal and state anti-kickback, self-referral, and false claims laws, where violations can result in significant monetary fines, penalties, and exclusion from federal healthcare programs[69][71] Risks Related to Common Stock Common stock risks include high volatility, low trading volume, no cash dividends, and significant control by a few shareholders, potentially deterring changes in control - The common stock price is highly volatile and trading volume is low, which could lead to substantial losses for purchasers and difficulty in selling shares[72][75] - A few shareholders, including directors and their affiliates, control a large percentage of the voting stock, giving them substantial influence over corporate matters[79] - The company has never paid cash dividends on its common stock and does not intend to in the foreseeable future[78] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[83] Properties The company leases office space and equipment, recognizing Right of Use (ROU) assets and lease liabilities on its balance sheet, with its primary office lease extending to June 2024 - The company adopted ASC 842, recognizing operating lease Right of Use (ROU) assets of $585,251 and a related lease liability of $598,917 as of December 31, 2019[88] - The primary property is a leased office space at 1200 Summit Ave., Fort Worth, TX, which was amended in July 2019 to increase space to 5,877 sq. ft. and extend the term through June 30, 2024[87] Maturity of Operating Lease Liabilities (as of Dec 31, 2019) | Year | Amount | | :--- | :--- | | 2020 | $150,887 | | 2021 | $151,317 | | 2022 | $151,333 | | 2023 | $154,271 | | 2024 | $77,870 | | Total lease payments | $685,678 | | Less imputed interest | ($86,761) | | Present value of lease liabilities | $598,917 | Legal Proceedings As of the filing date, the company has no outstanding legal proceedings - As of December 31, 2019, and the filing date of this report, the Company has no outstanding legal proceedings[91] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[92] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the OTCQB market, underwent a reverse stock split and name change in 2019, has not paid dividends, and completed a $10 million private placement with related parties - On May 10, 2019, the company completed a recapitalization that included a 1-for-100 reverse stock split, a reduction of authorized capital stock, and a name change to Sanara MedTech Inc[94] - The company has never paid cash dividends and does not plan to in the foreseeable future, intending to retain earnings for operations and expansion[96] - On October 15, 2019, the company closed a private placement offering of 1,204,820 shares of common stock at $8.30 per share, raising $10 million; the purchasers were related party entities to three board members[98] Selected Financial Data As a smaller reporting company, Sanara MedTech is not required to provide this information - As a smaller reporting company, we are not required to provide this information[99] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, revenues grew 34% to $11.8 million, but increased SG&A expenses led to a $2.8 million net loss, while a $10 million private placement significantly improved liquidity to $6.6 million cash on hand Financial Performance Comparison (2019 vs. 2018) | Metric | 2019 (Successor) | 2018 (Combined) | Change | | :--- | :--- | :--- | :--- | | Revenues | $11,766,763 | $8,779,872 | +34% | | Cost of Goods Sold | $1,209,300 | $852,124 | +42% | | SG&A Expenses | $13,297,520 | $7,715,613 | +72% | | Net Income (Loss) | ($2,814,088) | $175,464 | - | - The increase in SG&A expenses was primarily due to doubling the field sales organization from eight to eighteen representatives in 2019, consistent with the company's growth strategy[115][116] - Cash on hand increased significantly from $176,421 at year-end 2018 to $6,611,928 at year-end 2019, largely due to a $10 million private placement in October 2019[102][103] Cash Flow Summary (2019 vs. 2018) | Cash Flow Activity | 2019 (Successor) | 2018 (Combined) | | :--- | :--- | :--- | | Net Cash (Used in) / Provided by Operating Activities | ($2,167,401) | $517,079 | | Net Cash Used in Investing Activities | ($1,197,097) | ($27,770) | | Net Cash Provided by Financing Activities | $9,800,005 | $0 | - The company expects a decline in revenue due to the COVID-19 virus causing postponements of elective surgeries, and is proactively cutting costs and managing cash-flow[119] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sanara MedTech is not required to provide this information - As a smaller reporting company, we are not required to provide this information[123] Financial Statements and Supplementary Data The audited consolidated financial statements for 2019 reflect a reverse merger, showing $11.8 million revenue, a $2.8 million net loss, and a significant increase in cash to $6.6 million due to a private placement Consolidated Balance Sheets As of December 31, 2019, total assets significantly increased to $11.1 million from $1.7 million, driven by a rise in cash to $6.6 million, while total liabilities grew to $4.7 million and equity to $6.4 million Consolidated Balance Sheet Highlights (Successor) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $6,611,928 | $176,421 | | Total current assets | $8,855,764 | $1,690,681 | | Total assets | $11,117,162 | $1,709,458 | | Liabilities & Equity | | | | Total current liabilities | $2,639,821 | $1,122,661 | | Total liabilities | $4,724,762 | $1,122,661 | | Total shareholders' equity | $6,392,400 | $586,797 | Consolidated Statements of Operations For 2019, the company reported $11.8 million in revenues and a $10.6 million gross profit, but $13.3 million in operating expenses resulted in a $2.8 million net loss, contrasting with a $175k net income in 2018 Consolidated Statement of Operations (Year Ended Dec 31, 2019 - Successor) | Metric | Amount | | :--- | :--- | | Revenues | $11,766,763 | | Gross profit | $10,557,463 | | Total operating expenses | $13,297,520 | | Operating loss | ($2,740,057) | | Net loss attributable to Sanara MedTech Inc. | ($2,814,088) | | Basic and Diluted loss per share | ($1.32) | Consolidated Statements of Cash Flows In 2019, net cash used in operating activities was $2.2 million, investing activities used $1.2 million, while financing activities provided $9.8 million from a private placement, resulting in a $6.4 million net increase in cash Consolidated Statement of Cash Flows (Year Ended Dec 31, 2019 - Successor) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash used in operating activities | ($2,167,401) | | Net cash used in investing activities | ($1,197,097) | | Net cash from financing activities | $9,800,005 | | Net increase in cash | $6,435,507 | | Cash and cash equivalents, end of period | $6,611,928 | Notes to the Consolidated Financial Statements The notes detail the reverse merger accounting, key policies, the $10 million private placement, intangible assets, license agreements with Rochal Industries, debt facilities, and subsequent events including debt conversion and the $8.9 million NOL carryforward - The Cellerate Acquisition in March 2019 was accounted for as a reverse merger and recapitalization, with Cellerate, LLC deemed the accounting acquirer ('Successor')[145] - In October 2019, the company closed a $10 million private placement of common stock at $8.30 per share with related parties[184][186] - The company has exclusive license agreements with Rochal Industries for BIAKŌS™ products, involving upfront payments, milestone payments, and future royalties; the Executive Chairman and a director of Sanara have significant affiliations with Rochal[206][210] - Subsequent to year-end, on February 7, 2020, The Catalyst Group converted its entire holdings of the $1.5 million promissory note and Series F Preferred Stock into 2,452,731 shares of common stock, resulting in Catalyst controlling 56.7% of outstanding shares[240] - The company has a net operating loss (NOL) carryforward of approximately $8.9 million as of December 31, 2019, for which a full valuation allowance has been provided[232][233] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[243] Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2019, due to a material weakness from limited segregation of duties, and is evaluating remediation steps - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were not effective[244] - A material weakness was identified due to the small size of the Company and limited segregation of duties[248] Other Information This section details a consulting agreement with former chairman John Siedhoff, outlining monthly compensation for services through December 31, 2020 - The company had a consulting agreement with former chairman John Siedhoff; a new agreement effective February 1, 2019, provides for monthly compensation of $20,000 for 2019 and $10,000 for 2020[250] PART III Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's six directors and four executive officers, noting that the full Board performs audit, compensation, and nominating functions without standing committees Board of Directors | Name | Age | Position | | :--- | :--- | :--- | | Ronald T. Nixon | 64 | Executive Chairman | | James W. Stuckert | 82 | Director | | S. Oden "Denny" Howell Jr. | 80 | Director | | J. Michael Carmena | 64 | Vice Chairman | | Ann Beal Salamone | 69 | Director | | Kenneth E. Thorpe | 63 | Director | Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Zachary B. Fleming | 45 | Co-Chief Operating Officer and President, Surgical | | Shawn M. Bowman | 44 | Co-Chief Operating Officer and President, Wound Care | | Michael D. McNeil | 54 | Chief Financial Officer | | J. Michael Carmena | 64 | Principal Executive Officer | - The Board of Directors does not have standing audit, compensation, or nominating committees; the entire Board performs these functions[270] Executive Compensation The summary compensation table details 2019 compensation for four named executive officers, with total compensation ranging from $232,500 to $295,667, while directors received no cash or equity compensation 2019 Summary Compensation | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Zachary B. Fleming, Co-COO & President, Surgical | 2019 | 205,667 | 90,000 | 295,667 | | Shawn M. Bowman, Co-COO & President, Wound Care | 2019 | 205,667 | 80,000 | 285,667 | | J. Michael Carmena, Principal Executive Officer | 2019 | 209,600 | 75,000 | 284,600 | | Michael D. McNeil, Chief Financial Officer | 2019 | 169,500 | 63,000 | 232,500 | - Effective June 1, 2019, the company entered into two-year employment agreements with executives Shawn M. Bowman and Zachary B. Fleming, including base salaries of $225,000 and severance provisions[284] - During 2019, the company did not pay cash or equity compensation to its Board members for their service as directors[288] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of February 21, 2020, directors and executive officers beneficially owned approximately 80.5% of common stock, with Ronald T. Nixon holding 56.7%, indicating significant control over shareholder matters Beneficial Ownership as of February 21, 2020 | Name / Group | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Ronald T. Nixon | 3,416,587 | 56.7% | | James W Stuckert | 941,584 | 15.6% | | S. Oden "Denny" Howell Jr. | 481,165 | 8.0% | | All directors and executive officers as a group (6 persons) | 4,847,336 | 80.5% | - As of February 21, 2020, there were 6,023,732 shares of common stock issued and outstanding[294] Certain Relationships and Related Transactions, and Director Independence The company engaged in significant related-party transactions in 2019, including payments to Catalyst and Rochal Industries for services and product licenses, with key executives having affiliations with these entities - The company paid Catalyst and its affiliate, related to Executive Chairman Ronald T. Nixon, a total of $229,356 in 2019 for professional services[300] - The company paid Rochal Industries a total of $1,663,073 in 2019, including $1,500,000 for new product license agreements; Executive Chairman Ronald T. Nixon and Director Ann Beal Salamone are affiliated with Rochal[301][304] - Former director John C. Siedhoff received consulting fees under an agreement that provided $21,947 per month through December 2019 and $10,000 per month for 2020[305] Principal Accounting Fees and Services For 2019 and 2018, the company incurred audit fees of $88,000 and $68,303 respectively from MaloneBailey, LLP, and tax fees of $24,951 and $20,903 from Haynie & Company, all pre-approved by the Board Accounting Fees | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees (MaloneBailey, LLP) | $88,000 | $68,303 | | Tax Fees (Haynie & Company) | $24,951 | $20,903 | Exhibits, Financial Statement Schedules This section lists key exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and Sarbanes-Oxley Act certifications - Key exhibits filed include the Share Exchange Agreement with Catalyst, the Certificate of Designations for Series F Preferred Stock, employment agreements with executives, and product license agreements with Rochal Industries[310][311]